Regional diversification, relatedness and smart

specialisation

Ron Boschma

REGIO-ERSA Joint Lecture

DG Regional and Urban Policy

Brussels, 6 October 2017

structure

1. relatedness and diversification

2. knowledge complexity and diversification

3. diversification of European regions

4. implications for smart specialisation policy

5. role of regional institutions

2 recent publications

Balland, P., R. Boschma, J. Crespo and D. Rigby (2017), Relatedness, knowledge complexity and technological opportunities of EU regions, A framework for smart specialisation, Papers in Evolutionary Economic Geography, 17.17, Utrecht University

Cortinovis, N., J. Xiao, R. Boschma and F.G. van Oort (2017), Quality of government and social capital as drivers of regional diversification in Europe, Journal of Economic Geography, online available

1. relatedness and diversification

• smart specialisation is part of EU regional and innovation policy

• objective of smart specialisation is to develop new activities in regions, rather than to strengthen existing specializations in regions

• some features of smart specialisation policy:

- no ‘one-size-fits all’ policy: bottom-up strategy

- no duplication of policy: not ‘more of the same’

- policy targeting potential new activities based on regional capabilities, rather than just being ‘hot’

1. relatedness and diversification

• some critiques on smart specialisation:

- perfect example of policy running ahead of theory

- lacking evidence-base

- building on anecdotal evidence, rather than the application of theoretically grounded methodologies

1. relatedness and diversification

• smart specialisation policy requires a basic understanding of how regions diversify, and why their capacity to diversify differs between regions

• new specialisations are no random events: they are often strongly embedded in territorial capabilities

• local capabilities condition which new activities will be feasible to develop: they provide opportunities but also set limits to the diversification process in regions

• new specialisations grow out of related activities, in which new activities combine and exploit knowledge and skills from local related activities

related and unrelated regional diversification

region A region B

1. relatedness and diversification

• Hidalgo, Klinger, Barabasi and Hausmann (2007): how countries build a CA in new export products

- countries develop new export products that are closely related to existing export products

- countries with related variety: more opportunities to diversify and higher economic growth

• Neffke, Henning and Boschma (2011): industrial diversification in 70 Swedish regions 1969-2002

- industries that are technologically related to pre-existing sectors in a region had a higher probability to enter the region

2. knowledge complexity and diversification

• but smart specialisation is not only about developing new specializations in regions that have growth potential due to local related capabilities

• smart specialisation is also about developing new specializations in regions that are unique in the world : more complex that upgrade local economy (Hidalgo and Hausmann 2009)

• complexity of knowledge refers to the degree of its sophistication and the number of capabilities required to develop such new technology

3. diversification of European regions

• technological diversification in 282 European NUTS 2 regions (EU 27, Norway, Switzerland) 1985-2009

• patent data from the European Patent Office (EPO): 617 technology classes (IPC)

• entry-model, where y=1 if a region r gains a RTA in technology i, otherwise y=0

• RTA= share technology i in region r > share technology i in Europe

• growth-model: growth in number of knowledge claims in technology i

• main variables: relatedness and complexity

• relatedness: frequency of co-occurrence of technology classes on patent document

3. diversification of European regions

• density: how close a potential new technology i is from the current set of technologies j in region c

j

ij

j

jcij

ic

x

density

3. diversification of European regions

• average relatedness of European regions: potential of regions to diversify into new technologies

• positive effect of density on entry probability of a new technology in a region

• positive effect of density on growth of new technology in that region

average relatedness of European regions

3. diversification of European regions

• knowledge complexity index (KCI) based on method of reflection (Hidalgo & Hausmann 2009)

• network-based indicator: 2 mode network linking regions to technologies in which regions have RTA

• KCI combines information on:

- number of technologies in a region: diversity of regions

- number of regions producing a technology: ubiquity of technologies

• technology complexity (Balland and Rigby 2016): eigenvector method

top 15 technologies by complexity

3. diversification of European regions

• no or negative effect of complexity of technology on entry probability of that technology in a region

• positive effect on entry when complex technology related to existing technologies in region

• positive effect on growth when complex technology related to existing technologies in region

4. implications for smart specialization policy

• objective: develop a smart specialization policy

framework that is evidence-based, and that can

assist policy makers to identify possible

diversification strategies for regions, depending on

their existing capabilities

• relatedness: to assess potential risks of alternative

diversification strategies for regions

• complexity: to assess potential benefits of policy

4. implications for smart specialization policy

Low risk

High benefits

Low risk

Low benefits

High risk

High benefits

High risk

Low benefits

Low High Relatedness

Low

H

igh

Com

ple

xit

y

Ile de France region

Lancashire region

Extremadura region

5. role of regional institutions

• but how about regional institutions (Cortinovis et al. 2017,

Journal of Economic Geography)?

• formal institutions (laws, regulations, policies, etc.) reduce

uncertainty and enable new combinations and diversification

in regions

• European quality of government data recently available at

regional scale: significant within-country variations (Charron

et al. 2014) in Europe based on survey data on quality of

governance, impartiality and corruption

• hypothesis: positive effect of quality of government on the

probability that a region becomes specialized in a new industry

5. role of regional institutions

• informal institutions: social capital: ”features of social

organizations, such as trust, norms and networks that can improve the

efficiency of society by facilitating coordinated actions (Putnam et al.

1993, p. 167)

• social capital can have a positive effect (reducing uncertainty,

mobilizing resources, promoting collective action) but also a negative

effect (conformity and opportunistic behavior by established groups)

• distinction bridging and bonding social capital (Putnam 2001)

• bridging social capital: socio-economic heterogeneity: focus on

inclusiveness and cross-cutting interactions in society: access to

external capabilities

• bonding social capital: socio-economic homogeneity: internal

cohesion helps mobilizing support and solidarity but only to the

benefit of the group: leads to conformity and rent-seeking behavior

5. role of regional institutions

• social capital and regional diversification: provides potential to

make crossovers and combinations across different and

disconnected activities

• hypothesis: probability that a region specializes in a new industry is

positively related to level of bridging social capital in region

- bridging social capital: share of respondents volunteering in bridging

type of associations (Putnam groups)

• hypothesis: probability that a region specializes in a new industry is

negatively related to level of bonding social capital in region

- bonding social capital: share of respondents volunteering in bonding

type of associations (Olson groups)

5. role of regional institutions

• substitution effect between formal and informal institutions?

• social capital being relevant only when formal institutions are weak (Ahlerup et al. 2009)

• hypothesis: bridging social capital has a stronger positive effect on the probability that a region specializes in a new industry when quality of government is low

• hypothesis: bonding social capital has a stronger negative effect on the probability that a region specializes in a new industry when quality of government is low

5. role of regional institutions

• study of industrial diversification on 118 (NUTS-2)

European regions in 13 European countries 2004-2012

• to estimate effects of relatedness and institutions at t on

developing specialization in a new industry in region at t+5

• ORBIS dataset Bureau Van Dijk: 323 tradable industries

• binary dependent variable: value 1 if country has acquired a

new specialization in industry i at t+5, value of 0 otherwise

• specialization: computation of (standardized) location quotient

on industrial employment

5. role of regional institutions

Hypotheses: direct effects of institutional variables

Model 1

Model 2

Model 3

Model 4

Model 5

VARIABLES

density 0.0208*** 0.0205*** 0.0203*** 0.0206*** 0.0204***

(0.00129) (0.00129) (0.00129) (0.00129) (0.00130)

EQI 9.72e-06 -0.000570 -0.000341

(0.000428) (0.000442) (0.000444)

Trust 0.00136*** 0.00156***

(0.000444) (0.000458)

Brid. SK 0.00223*** 0.00233***

(0.000669) (0.000681)

Bond. SK -0.000332 -0.000415

(0.000456) (0.000474)

Observations 99,037 97,768 97,768 97,768 97,768

R-squared 0.025 0.025 0.026 0.025 0.026

Industry_year FE YES YES YES YES YES

5. role of regional institutions

Hypothesis: substitution effects between quality of government and social capital

Model 1 Model 2 Model 3 Model 4

VARIABLES Low EQI Low EQI High EQI High EQI

density 0.0212*** 0.0207*** 0.0270*** 0.0269***

(0.00257) (0.00257) (0.00386) (0.00387)

EQI -0.000503 -0.000109 0.000490 -0.00571

(0.00104) (0.00101) (0.00607) (0.00671)

Trust 0.00137 0.000669

(0.000960) (0.00135)

Brid. SK 0.00469*** 0.00224*

(0.00136) (0.00121)

Bond. SK -0.00188** 0.00317

(0.000835) (0.00194)

Observations 28,419 28,419 15,954 15,954

R-squared 0.067 0.068 0.088 0.089

Industry_year FE YES YES YES YES

5. role of regional institutions

• positive effect of density on regional diversification

• institutions matter for regional diversification

- positive effect of social capital

- positive effect of bridging social capital

- no effect of bonding social capital

- no general effect of quality of government

- but with low quality of government: bridging social capital

stronger positive effect, while bonding social capital turns

from no effect into a negative effect

6. concluding remarks

• yet, we are far from a comprehensive policy framework:

- design and implementation of smart spec policy?

- relevant for peripheral regions: bring it in line with objectives of Cohesion Policy?

- inherent tension between prioritising based on relatedness in our policy framework and reliance on decentralized entrepreneurial discovery process

- besides regional capabilities, what is role of extra-regional linkages and agents (Neffke et al. 2017)?

- should smart spec policy enable jumps or not?

thank you for your attention!

Balland, P., R. Boschma, J. Crespo and D. Rigby (2017), Relatedness, knowledge complexity and technological opportunities of EU regions, A framework for smart

specialisation, Papers in Evolutionary Economic Geography, 17.17, Utrecht University

Cortinovis, N., J. Xiao, R. Boschma and F.G. van Oort (2017), Quality of government and social capital as drivers of regional

diversification in Europe, Journal of Economic Geography, online available

where to intervene in the industrial structure of a region?

3. technological diversification of European regions